Krugman’s Confessional

Krugman seems to have come back to earth. His latest NY Times article is a lengthy discussion of how economists, by and large, got it wrong about seeing the impending financial collapse. Ironically, I’ve only got 6 hours of college economics, 3 of which I CLEP’d out of, and I saw it from a mile off.

The difference? I didn’t pretend to have a numerical approximation for everything. The history was obvious: economic bubbles pop. The dotcom bubble didnt’ properly pop, so wherever the money went from that would lead to a bigger bubble. Lucky us, it went to real estate, where all bubbles go to pop.

But the complete failure of the economic establishment to do the ONE THING they’re supposed to do really disturbs me. You see, economists are supposed to smooth out the business cycles. They are supposed to help us from rising too high and falling too low. Not one of the establishment wonks admitted things were going wrong because of their irrational belief in the complete rationality and efficiency of markets and their participants.

That’s the problem with economics. There’s too much belief in the numbers side and not enough recognition of the game theory side of things. Game theory is part of microeconomics: it should also be part of macroeconomics. Game theory shows how what may be rational choices for an individual can become irrational choices for groups. We just had a spate of irrational group choices and we’re headed for more.

My question is this: if they got it so wrong with the bubbles and the popping, how well-equipped are they to handle what’s up next? And why are they still in charge of things? Is the educational and monied elite that ensconced in our government?

I have a suggestion… how about we just go about disbelieving anyone in power? That way, we can make better plans for our future.

16 thoughts on “Krugman’s Confessional

  1. Aaron

    Thanks for sharing, Dean. The behavior of a big, complex system is terribly difficult to fully understand, much less reliably predict. And it’s clear, from recent electoral results in Texas, that *all* of us are *not* smarter than any one of us.

    “THERE ARE IDIOTS. Look around.”

  2. David Belachew

    I think after something like 50 monthss of continuous job creation, the economists were doning a good job. But I believe so much success, thses people became very cocky and somewhat naive, and failed to help the American people. These people have ignored history once again because they believed they were too smart for follow ing the same mistakes in the ’20’s. Obama should not compromose with anone with the econmy, by comprimosing you going to weakn the economy in a futher ressession

  3. James Aiuvalasit

    Hope for the best; prepare for the worst.

    Regardless of what any economist says or how the economy appears, it is necessary to take precautions. The only problem is that I don’t know what precautions we could have taken to make our current recession not so bad. I’m not an economist (and probably never will be after my lousy quiz grade).

  4. Hugo Espiritu

    First of all(In response to your rhetorical questions) these people are heeded only because of the degree they got. Just because you know alot doesn’t mean you know how to use it. Secondly I hope these economists learn from their mistakes because if not the vast majority who listen to them will make everything worse by doing the wrong things. If these financial mavens don’t get with the program the only way to be safe is to get a PhD in Economics( or the equivalent, 6 hours of college economics).

  5. Matthew Wong

    They were not positive about what was going to happen. The lines can go eitheir way and people make a lot of mistakes. This.. is a big one

  6. David Liou

    Since history always manages to repeat itself no matter how “educated” we become, people are always ignorant will make the same over and over again, so bubbles will continue to form and pop.

  7. deanwebb Post author

    These guys flat-out missed a call on a speculative bubble, just like they missed it on the dotcom speculative bubble. The only economists that did call the bubble were shouted down by the chorus of orthodox believers in the free market.

    When everyone gets the green book, we’ll take a field trip to chapters 16-19. They’re quite hilarious in their predictions for the future based upon the giddiness of the late 90s. Then the sad thing is that that material was intended to teach people about a new economics where things are always on the upswing.

  8. Hugo Espiritu

    I’m just wondering if there has ever been a bubble with precious metals. Is that possible? And if it is what would happen if that bubble popped?

  9. deanwebb Post author

    You got google. See if you can look it up. 🙂

    And yes, there was. It’s part of the reason we’re no longer on a bimetallic standard.

  10. Hugo Espiritu

    I looked around and I found out that the bimetallic standard is where two metals, namely gold and silver, are used in coin form as currency. It is used to control the value of money by having a weight to price ratio between the two metals. The US stopped using the bimetallic standard after the Civil War when it said that paper currency could be converted to gold.

  11. David Liou

    What’s wrong with a bimetallic standard with gold and platinum?

  12. Hugo Espiritu

    The only wrong thing I could think of is that there isn’t that much platinum to be using it as currency.

  13. David Liou

    Mr. Webb, you said in class that the next bubble would be in commodities. How would the bubble created affect our everyday lives?

  14. Hugo Espiritu

    I think it would mainly affect farmers and commodities investors. On the other hand maybe beef, pork, and other livestock derived products would raise in price making them more expensive for the average person. On the other hand maybe the only way we would get affected by the bubble is when it crashes and the economy goes into another recession.

    Disclaimer: I do not have three hands, I borrowed someone elses to make my point.

  15. deanwebb Post author

    Commodities hits food hard. It also hits AS hard: remember, prices of raw materials will affect aggregate supply and higher prices mean lower GDP.

    Also, the bimetallic standard fell apart when the prices of gold and silver drifted away from the official exchange rates the government posted for convertibility.

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